4 questions to ask before using a mortgage broker
Due to stubborn inflation, purchasing a home today is much more expensive than it was four years ago, even with inflation cooling in recent months. In fact, the median price of homes in the U.S. reached $442,525 in June, according to Redfin, which is a 4% increase compared to last year. On top of that, today's mortgage rates remain elevated, which makes buying a home even more expensive. As of July 24, the average 15-year mortgage rate is 6.32%, while the average 30-year mortgage is 6.86%.
Because of today's high home prices, people are looking for alternative ways to save money on their home purchases, which could include using a mortgage broker. After all, a broker often has access to several lenders, which means they may have a better chance of saving a consumer money than a direct lender. However, before you use a broker, you should ask some questions. We spoke to some experts to learn more.
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4 questions to ask before using a mortgage broker
Before using a broker to save money, experts say to ask these four questions.
Are you a self-employed borrower or a W-2 employee?
Some experts recommend asking yourself a few questions before deciding whether to use a mortgage broker for your home loan.
Phil Galante, mortgage broker and certified divorce lending professional at ProMortgage, says the first thing to do is to consider whether you're a self-employed borrower or W-2 employee.
"If you're a W-2 earner with good credit and a high down payment, or you're a borrower who needs a Jumbo loan, a bank may be a better option," according to Galante. However, he says that if you're self-employed or in a more challenging situation a broker will often have a wider variety of loan options available to you.
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Are they willing to negotiate their compensation?
Galante says working with a broker can often save consumers money because they have more flexibility when negotiating their compensation. So, before you work with one, ask the broker if they'd be willing to lower their compensation to save you money.
"If they decide to lower their compensation, you as the borrower can pay less in closing costs than with a direct lender," Galante says. "Brokers often have better rates than direct lenders for conventional conforming loans, which are home loans under the Federal Housing Finance Agency's (FHFA) maximum loan limit," he says.
Do you have a referral?
Not all mortgage brokers are created equal, says Sarah Alvarez, Vice President of Mortgage Banking at William Raveis Mortgage. As a result, she recommends asking your real estate team and friends for a referral.
If you're unable to get a referral for a broker, read reviews on review websites like the Better Business Bureau and Trustpilot. Doing this can help you learn what other consumers say about their experience with a certain broker.
Is the broker licensed to do business in my state?
Before you do business with a broker, check to see whether they're licensed to do business where you intend to purchase the home. You can check this by visiting the National Multistate Licensing System (NMLS) website and searching for the broker's name.
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How to decide between a broker and direct lender
Before using a mortgage broker to buy a home, experts say you should consider the benefits and drawbacks of taking this route instead of using a direct lender.
According to Galante, direct lenders, such as banks and credit unions, have more conservative underwriting guidelines and more control over the loan process (processing, underwriting and closing). As a result, he says this control can speed up the overall process. So, choosing a direct lender might be the ideal choice if you want to close on a home loan as fast as possible.
On the other hand, Galante says brokers often have access to a wider variety of loan programs by acting as intermediaries between borrowers and lenders.
"Each lender has their own underwriting guidelines, strengths and weaknesses and processes and procedures. A good broker successfully navigates the traits and characteristics of each lender as they work with on your behalf," Galante adds.
He also says direct lenders can be a better choice than brokers if you have stellar credit. Plus, if you're taking out a jumbo loan, using a direct lender is ideal because they usually offer lower rates, says Galante. A jumbo loan is a loan that exceeds the FHFA's maximum loan limit, which ranges from $766,550 to $1,149,825 depending on where you live, says Galante.
How to save money on a mortgage now
While working with a mortgage broker could save you money, it's not the only way to get a lower mortgage rate in today's economy.
Some other steps you can take include shopping around, improving your credit before applying and buying mortgage points. That said, before you buy mortgage points to lower your rate, Alvarez says to do the math. "In many cases, purchasing mortgage points to lower your rate doesn't make sense today," she says.
That's because, in her opinion, you are unlikely to realize the savings of the slightly lower rate. Instead of doing this, she recommends putting extra funds toward closing costs for a refinance down the road.
The bottom line
In today's economy, working with a broker could save you money. That's because a mortgage broker's job is to shop the market and make sure that you're getting the best rate and mortgage product available for your situation, says Alvarez. However, before taking this path, you should compare the cost of alternative options, like working with a direct lender via a bank or credit union. In addition, you should explore other ways to secure a lower mortgage rate, such as applying for a shorter-term loan if you can afford higher monthly payments or shopping around on your own.
